Three-year Finding &Development costs among Canadian drillers averaged $10.96

One of the most fundamental goals of an oil and gas company is replacing reserves. If a company is unable to replace reserves effectively, it in essence has a finite life span. Why? Because draining a formation of hydrocarbons eliminates your reserves.

Excluding the effects of price fluctuations and asset sales, oil and gas companies continuously produce from reserves. The ability to replace this production, whether through the drill bit or transactions, is critical to sustain any company in an extractive industry.

Merely replacing reserves, however, is not enough. The price paid to grow reserves is critical. Keeping finding and development costs low ensures operations are economic, and companies are able to grow in a sustainable manner.

EnerCom Analytics’ calculation of F&D costs include all reserve additions over the past three years, including revisions, divided by costs incurred over the period. If reserves fell over the past three years, F&D costs are incalculable.

Downturn impairments hit hard

Examining reserve metrics such as production replacement and F&D costs over the past three years involves an elephant in the room — the commodity price downturn. The current three-year data includes 2015, when falling prices led to significant impairments and downward revisions.

Most companies saw reserves fall in 2015, and for some reserves also fell in 2016. While improvements in operations and rising prices in 2017 reintroduced growth, making up for previous declines is difficult. Out of 121 major oil and gas companies, 15 saw reserves impairments outweigh additions and acquisitions in the past four years, and several others saw only slight net increases. Those with slight increases often see skewed reserves data, with excessively high three-year F&D costs.

The extreme example of this case is Rex Energy, which reported large impairments in 2015, but added reserves in 2016 and 2017. Overall, the company added a mere 46 MBOE of reserves over the three years, essentially flat for a company with over 170 MMBOE of total proved reserves.

Oh Canada: looking at 121 U.S. and Canadian E&Ps, three-year F&D costs range from $0.83/BOE to $8,700/BOE

The 121 U.S. and Canadian companies in EnerCom’s database showed significant variability in three-year F&D costs, ranging from Connacher Oil and Gas with a mere $0.83/BOE to the aforementioned Rex Energy with an F&D cost of $8,700/BOE. Not counting the companies that are skewed by impairments, U.S. and Canadian firms recorded an average F&D cost of $13.97/BOE. This average is an improvement from the average three-year F&D of both 2015 and 2016, which were $19.11 and $16.89, respectively.

Looking to Acquire Cheap Reserves? Look North

Source: EnerCom Analytics

Looking to Acquire Cheap Reserves? Look North

Source: EnerCom Analytics

Canadian companies, in general, display a lower F&D cost than their American counterparts. The average three-year F&D among Canadian E&P firms is $10.96/BOE, compared to $15.96 for U.S. companies.

This disparity is likely due to several factors.

First, and perhaps most importantly, is the location most Canadian firms operate. Many companies are active in the Montney, which is comparable to the Marcellus in the United States. The play is in the process of delineation, and has tremendous amounts of gas in place. It is cheaper to prove reserves in a gas play, particularly one as prolific as the Montney, and the companies operating there are benefiting from the depth of knowledge in the play and from the resource’s strong economics.

Furthermore, Canadian reserves standards are different from those in the U.S., and are generally more aggressive. Canadian companies are allowed to use strip pricing when evaluating reserves, while U.S. companies use an average of the price from the first day in each of the past 12 months. This has allowed Canadian companies to evaluate reserves at a higher price for both of the past two years, essentially contributing “free reserves.”

Gas reserves are typically cheaper, but not always

F&D costs are partially dependent on a company’s production mix, but not to the degree that might be expected. With the low price of natural gas, it would seem likely that gas-focused companies would show lower F&D costs than oil-focused firms. Most gas-weighted companies do have very low F&D costs, a trend more obvious in Canadian companies, but being oil-weighted does not necessarily mean a company has high F&D. Connacher, for example, is entirely oil-focused but reported the lowest F&D costs of any company in the EnerCom database.

Looking to Acquire Cheap Reserves? Look North

Source: EnerCom Analytics

Gas-weighted Canadian companies show a remarkable consistency in F&D costs, far more so than their U.S. peers. This is likely a result of the unanimity of Canadian gas players. Almost all gas-focused Canadian companies are operational in one basin, the Montney, while U.S. gas firms have multiple basins to choose from.

Appalachian firms show very consistent, low F&D costs

Individual basins have varying F&D costs, with different levels of expense and consistency. Companies operating in the Marcellus and Utica reported consistent F&D, with a range of under $4/BOE. Firms in the Eagle Ford and DJ are nearly as consistent, while the Permian and Bakken have a wider range of F&D costs.

Looking to Acquire Cheap Reserves? Look North

Source: EnerCom Analytics

In the most popular basin in the U.S., reported F&D costs per BOE range from a low of $4.68 to a high of $25.07. Generally, a Permian company’s F&D cost is dependent on the means of acquiring reserves and the maturity of the company’s position. Companies such as Approach, Abraxas and Energen reported the lowest F&D costs in the play, with each spending less than $11 to add a barrel of reserves. The low cost is in large part due to how these reserves were added. Each company increased reserves significantly in the past year, but almost none of the additions came from acquisitions. Spending on acquisitions accounts for a small portion of the total costs incurred by each firm, with Abraxas in particular spending less than 1% of its total costs incurred on acquisitions.

The most expensive Permian firms, on the other hand, show the reverse. Resolute, Diamondback and Centennial spent the most to add reserves in the past three years, with F&D costs between $21 and $26. Diamondback and Centennial each spent more than 80% of total costs incurred over the past three years on acquisitions.

Reserves growth through acquisition is the most costly form of reserves additions a company can pursue. While there are a number of considerations which feed into a decision to purchase acreage, whether it has flowing production already or not, the acquiring company will pay a premium for those assets compared to adding reserves to existing acreage through the drill bit.

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